Balance of payments and Exchange Rates. Balance of payments & exchange rates The balance of payments account Example of UK balance of payments The balance.

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Balance of payments and Exchange Rates

Balance of payments & exchange rates The balance of payments account Example of UK balance of payments The balance of payments account Example of UK balance of payments

Balance of payments & exchange rates The balance of payments account The current account The balance of payments account The current account

UK balance of payments: 2001 (£ millions)

Current account balance as % of GDP in selected countries: 1970–2003

UK Current account balance as % of GDP in selected countries: 1970–2003

USA UK Current account balance as % of GDP in selected countries: 1970–2003

USA Japan UK Current account balance as % of GDP in selected countries: 1970–2003

Balance of payments & exchange rates The balance of payments account The capital account The balance of payments account The capital account

UK balance of payments: 2001 (£ millions)

Balance of payments & exchange rates The balance of payments account The financial account The balance of payments account The financial account

UK balance of payments: 2001 (£ millions)

Balance of payments & exchange rates The balance of payments account The overall balance of payments The balance of payments account The overall balance of payments

UK balance of payments: 2001 (£ millions)

Balance of payments & exchange rates Exchange rates

Sterling exchange rates: 1980–2003

Balance of payments & exchange rates Exchange rates Determination of the exchange rate Exchange rates Determination of the exchange rate

$ price of £ Q of £ Determination of the rate of exchange

$ price of £ D by USA Q of £ Determination of the rate of exchange

$ price of £ QSQS S by UK Q of £ Determination of the rate of exchange D by USA QDQD ba

QSQS QDQD d $ price of £ Determination of the rate of exchange S by UK Q of £ c D by USA

Balance of payments & exchange rates Exchange rates Changes in the exchange rate Exchange rates Changes in the exchange rate

Floating exchange rates: movement to a new equilibrium / £ S1S1 D1D1 Q of £

/ £ S1S1 D1D1 S2S2 Q of £ Floating exchange rates: movement to a new equilibrium

/ £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

Balance of payments & exchange rates Exchange rates Speculation against exchange rate movements Exchange rates Speculation against exchange rate movements

O Exchange rate Quantity of £s S1S1 D1D1 er 1 Stabilising speculation

O Exchange rate Quantity of £s er 2 S2S2 D2D2 S1S1 D1D1 er 1 Stabilising speculation

O Exchange rate Quantity of £s S3S3 D3D3 er 3 er 2 S2S2 D2D2 S1S1 D1D1 er 1 Stabilising speculation

O Exchange rate Quantity of £s S1S1 D1D1 er 1 Destabilising speculation

O Exchange rate Quantity of £s S2S2 D2D2 er 2 S1S1 D1D1 er 1 Destabilising speculation

O Exchange rate Quantity of £s S2S2 D2D2 er 2 er 3 S3S3 D3D3 S1S1 D1D1 er 1 Destabilising speculation

Balance of payments & exchange rates Exchange rates Movements in the sterling exchange rate over time Exchange rates Movements in the sterling exchange rate over time

$ / £ exchange rate and £ exchange rate index: $ / £

$ / £ exchange rate and £ exchange rate index: $ / £

$ / £ exchange rate and £ exchange rate index: $ / £ Index 1990=100

$ / £ exchange rate and £ exchange rate index: $ / £ Index 1990=100

Balance of payments & exchange rates Exchange rates Movements in the dollar/euro exchange rate from 1999 to 2003 Exchange rates Movements in the dollar/euro exchange rate from 1999 to 2003

Fluctuations between the euro and the dollar

US interest rate

Fluctuations between the euro and the dollar US interest rate ECB interest rate

Fluctuations between the euro and the dollar $ / US interest rate ECB interest rate $ /